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Month: October 2017

With the SPDR S&P Biotech ETF XBI [disclosure: We hold no position in XBI] within 5% of its all time highs, we hear a lot of people calling biotech a bubble. Let’s be clear, biotech is not a bubble. There are may be many bubbles out there, but this is not one. And if that is too much of a leap for you to take, then assume biotech is a bubble but that it will get a lot bigger, so big that Trump is going to have to invent a new word to describe it (my vote is for Yugenormous).

After falling 50% from the peak the SPDR S&P Biotech ETF XBI has almost fully recovered and is within 5% of the all-time highs. Despite this resurgence, some biotech companies irrespective of the quality of their drugs are still down over 90% from their 2015 highs.

These companies to the community at large are practically untouchable. Fund managers are afraid to touch them because they are too illiquid. And even if analysts understood the science (which they don’t), they won’t bother to cover companies of so little consequence, which means retail investors know nothing about them as well.

In short, these are hated companies, and yet these companies were able to tap the market for funding at an extreme overvaluation back in 2015 allowing them to ride out the storm which we have believe is now over.

We’ve begun to see flows come back into some of these “left for dead” companies. Some of which have doubled and tripled without any news whatsoever. To be clear these are hated rallies, simply for the fact that no one owns them. And for some perspective a company that falls 90% then doubles is still down 80% from its highs. The bull market in biotech is still in its infancy and we think the macro backdrop supports this for three main reasons:

1. The regulatory backdrop in the US for bringing new drugs to market has never been better. Meanwhile, big pharma companies, with their dwindling legacy pipelines and boatloads of cash, have a decision to make, develop new drugs, buy new drugs at a premium, or fade away. Gilead’s recent $12B acquisition of Kite Therapeutics is likely to be the beginning of a wave of acquisitions.

2. The 2nd largest and fastest growing market for pharmaceuticals, China, is in the early stages of opening itself to big pharma.

“Under China’s new rules, data from overseas clinical trials can be used for drug registrations in the country. “

China’s large population combined with its environmental and pollution problems combined with a poor diet/lifestyle have been a perfect storm for creating massive demand for high quality pharmaceuticals. From McKinsey:

“China faces mounting medical needs—for example, it has 114 million diabetic patients and more than 700,000 new cases of lung cancer diagnosed each year.”

But don’t forget, the rest of the emerging world is growing and gaining wealth.

"We are witnessing the most rapid expansion of the middle class, at a global level, that the world has ever seen." ~ Brookings Institute pic.twitter.com/YzwpUXu429

As the emerging world’s middle class grows, so too will its demand for prescription drugs. Not only will this create profits for US drug companies, but it will also reduce their reliance on overcharging US consumers for access to medicine. This in turn will reduce the cost of health care in the US at the same time quality of care improves…

3. It’s 2017 and we are still using chemotherapy and statins to treat deadly diseases. This is simply appalling. The truth is that advancement in pharmaceutical care since the War on Cancer was declared back in the 1970s has been pathetic, especially when you consider the amount of money thrown at the problem.

But that too is finally changing. Real drugs offering real improvements in patient outcomes are coming down the pipeline. Cancer, alzheimer’s, cardiovascular disease, mitochondrial malfunctions, you name it there’s likely a drug coming to change patient outcomes for the better. And as these drug breakthroughs come to light we believe this sector will experience yet another euphoria driven bubble that could make the 2015 peak look like an ant hill.

DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!